Intellidex ETF Picks
International Exchange Traded Funds (ETFs) are making waves and hit the sweet spot yet again in the Intellidex October ETF picks, check them out EasyVestors!
Global markets were weaker in October as the gloom of increased Covid-19 infections in the US and Europe continued to spook investors. In addition, the Chicago Board Options Exchange’s volatility index spiked (to 38.0 points) towards the end of October ahead of the US elections (taking place at the time of writing), with the result difficult to predict.
Gold, a haven for investors during a crisis (or expectation thereof) declined by 3.3%. The MSCI World Index, a barometer for the dollar performance of developed market equities, fell 3.1%. This brings its year-to-date (YTD) return down by 2.8%. Emerging markets were favored by investors as the MSCI Emerging Markets Index returned 2.0% in dollar terms. The YTD performance of the index is almost flat, down 1.0%.
Now for their pick of ETFs
Local (Domestic equity):
We still favor exposure to anti-volatility strategies as we expect volatility to remain high in the short term. The JSE offers such funds and investors can choose among three, depending on their risk profile.
These funds manage volatility and drawdowns simultaneously. They try to maintain the same amount of volatility within the fund under all market conditions by reducing equity exposure in times of high volatility and increasing the fund’s cash component, and vice versa.
The most conservative of the three funds is the NewFunds Volatility Managed Defensive Equity ETF with a target volatility (TV) of 8%; followed by NewFunds Volatility Managed Moderate Equity ETF with a TV of 15%; then the Volatility Managed High Growth Equity ETF with a TV of 20%. Investors with a preference for value may consider the Satrix FINI ETF (-6.0%) that provides exposure to SA’s listed banks and financial services companies. Its TER is 0.43%.
For those who’d like to add quality shares to their portfolio, the Satrix Quality SA ETF (-5.3%) may be useful, exposing investors to companies with strong fundamentals needed to operate in SA’s increasingly poor economic environment. Its TER is 0.34%.
International (Developed Markets):
We maintain our foreign exposure with the broad-based Satrix MSCI World Equity Feeder ETF
(-6.7%). A good alternative, though, is the Ashburton Global 1200 Equity ETF (-6.1%) is a good alternative, but it has a higher TER of 0.65%.
Furthermore, you can add the 1nvest S&P 500 Info Tech Index Feeder (-8.0%) as a satellite fund for exposure to technology shares. However, this exposure may cost you with a TER of 0.72% as the ETF is a feeder-fund, investing proceeds into the iShares S&P 500 Information Technology Sector UCITS ETF.
International (Emerging Markets):
The Satrix MSCI Emerging Markets ETF (-1.5%) remains our only broad-based option. However, the new Satrix MSCI China ETF (+2.2%) provides an opportunity to increase exposure to the relatively strong post Covid-19 recovery in China.
Also, the highly volatile Cloud Atlas AMI Big50 (-17.2%), which focuses on African equities, can be used to take a long view on the prospects of Africa, the truly remaining frontier market.
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Dividend & Income-themed:
For investors who rely on investment income to fund day-to-day expenses, an allocation of a portion of your portfolio to ETFs that pay a high amount of dividends may be useful. We maintain our choice of dividend-focused strategies like the CoreShares S&P Global Dividend Aristocrats ETF (-3.6%) and the CoreShares South Africa Dividend Aristocrats ETF (-4.3%).
A key advantage of the dividend aristocrat strategy applied by these funds is that it selects constituents based on the actual dividend payouts rather than a dividend yield. This is particularly important now when financially challenged companies may deceptively exhibit high yields because of low market prices.
The strategy also tends to select companies that can endure difficult market and economic environments and whose earnings are not cyclical. Such funds are usually overweight in highly cash-generative and resilient sectors.
The main drawback is that these funds are pricey. The CoreShares S&P Global Dividend Aristocrats has a TER of 0.78% and the CoreShares South Africa Dividend Aristocrats ETF costs 0.63%. An alternative for the local choice is the CoreShares PrefTrax ETF. Although pricey with a TER of 0.60%.
Bonds and Cash:
SA’s recent MTBPS confirmed that the fiscus will deteriorate as tax collection shortfalls persist over the medium term, owing to Covid-19 induced effects and poor fiscal management before the pandemic. The tax/GDP ratio is only expected to recover to the 2019/20 level in 2027/28. However, our local bond yields are higher than global bond yields and this could drive global investment into our local bonds in a “risk-on” environment, which would increase bond prices. As a result, an investor can gain exposure to local bonds through the Satrix SA Bonds ETF (+0.8%).
This fund pays a quarterly dividend which can provide relief to an investor in the current environment of declining disposable income.
The only other option on the JSE is NewFunds S&P Namibia Bonds (+1.7%). As “risk-on” sentiment improves, such bonds are likely to recover as investors start searching for better yields. For short-term investors, usually less than a year, we maintain the NewFunds TRACI (+0.3%) as our choice
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If you find the process of diversifying your portfolio daunting, two ETFs will do it for you. They combine equities and bonds to produce a diversified portfolio for two investor archetypes with differing risk appetites: Mapps Protect ETF (-0.6%) is more conservative, usually suitable for older savers.
Mapps Growth ETF (-1.8%) suits investors with a longer-term horizon. Notably, both funds invest in SA-listed assets, thus lacking an offshore allocation.
Adding a commodity ETF to your portfolio improves diversification because commodities march to the beat of their own drum – they are not in synch with broader markets. Rhodium has been our metal of choice since the start of last year and improved our portfolio performance. It seems the metal was also able to recover most of its Covid-19 losses. In addition, the structural drivers for Rhodium remain strong on demand for greener and cleaner technology and Rhodium remains in short supply.
The 1nvest Rhodium ETF (-8.5%), is our preferred vehicle for investors seeking exposure to Rhodium as it presents stronger fundamentals out of all the PGMs. This ETF is backed by physical Rhodium. The drawback is that the EFT is quite pricey, with a TER of 0.75%.
The Intellidex Core ETF Portfolio Roundup
With an uncertain outlook and volatility expected moving forward, we continue favoring a strategy that seeks diversification through offshore allocations in portfolios.
The uncertain outlook discussed above calls for a strategy of investor patience and portfolio diversification with a healthy allocation offshore. In addition, recent rand strength may provide relatively cheaper buying opportunities, with any future depreciation boosting translated investment performance.
Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
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